Originations

The amount of debt consumers are absorbing to acquire a new or used vehicle reached record highs during the fourth quarter, according to the latest State of the Automotive Finance Market report from Experian.

With consumers turning to longer-term contracts to help reduce costs of monthly payments, Experian reported on Thursday the average contract amount for a new vehicle reached a record high of $30,621 in Q4 2016. The average finance amount for a used vehicle also reached record levels, jumping from $18,850 in Q4 2015 to $19,329 in Q4 2016.

The report also showed the number of consumers opting for contracts with terms of 73 to 84 months on their new vehicles increased from 29 percent in Q4 2015 to 32.1 percent in Q4 2016. In the used-vehicle market, Experian found there was an increase in 73- to 84-month loans from 16.4 percent in Q4 2015 to 18.2 percent in Q4 2016.

“With the average loan amount for new and used vehicles hitting all-time highs, we are seeing the need for affordability drive consumer purchasing behavior,” said Melinda Zabritski, Experian's senior director of automotive finance.

“Our latest research shows an $11,000 gap between the average loan amount on a new and used vehicle — the widest we have ever seen,” Zabritski continued. “This upward trend is causing many consumers to find alternative methods like extending loan terms, getting a short-term lease or opting for a used vehicle to get what they want while staying within their monthly budget.”

For consumers who still want to drive something new, Experian computed that leasing a new vehicle costs an average of $92 less per month compared with financing. The average monthly payment for a new leased vehicle is $414, versus $506 per month for a new-vehicle purchase.

The number of consumers who chose to lease a new vehicle increased slightly from 28.87 percent in Q4 2015 to 28.94 percent in Q4 2016, according to Experian’s report.

Delinquency on the rise, too

Another key finding in the report is the increase in delinquency rates year-over-year. Experian indicated 30-day delinquencies inched up slightly from 2.42 percent in Q4 2015 to 2.44 percent in Q4 2016, while 60-day delinquencies increased from 0.71 percent to 0.78 percent.

In response to these increases in delinquencies, Experian asserted that finance companies continue to adjust their underwriting strategies by shifting more contracts toward customers with better credit.

For new-vehicle financing, the average credit score moved from 712 in Q4 2015 to 714 in Q4 2016. For used-vehicle contracts, the average credit score jumped 5 points from 649 in Q4 2015 to 654 in Q4 2016.

Overall, Experian said financing to deep-subprime and subprime customers decreased from 22.05 percent of the total lending market in Q4 2015 to 20.82 percent in Q4 2016. Financing to prime and super prime customers jumped from 57.86 percent in Q4 2015 to 59.41 percent in Q4 2016.

“Delinquencies are always an important indicator of the overall health of the automotive lending market, but it's equally important to watch how lenders react when they see a rise,” Zabritski said.

“The shift to a higher percentage of prime and subprime customers is a natural consequence of the slight growth in delinquencies,” she continued. “Overall, we are still looking at a very healthy lending market.”

The report also showed that used vehicle financing grew to 41.85 percent in the super prime consumer segment, an increase of 5.4 percent year over year. Moreover, franchised and independent vehicle dealers saw their biggest year-over-year increases in super prime consumer lending, with 5.91 percent and 13.8 percent, respectively.

Other key findings for Q4 2016:

—Total open automotive finance balances reached a record high $1.072 trillion in Q4 2016, up from $987 billion in Q4 2015; however, year-over-year growth is continuing to slow.

—Banks lost market share of total vehicle financing, dropping from 35.6 percent in Q4 2015 to 32.9 percent in Q4 2016.

—Credit unions and captives increased market share of total vehicle financing, growing to 19.1 percent and 28.4 percent, up from 18 percent and 27.8 percent, respectively.

—The average monthly payment for a new-vehicle contract was $506, up from $493.

—The average new-vehicle lease payment was $414, up from $412.

—The average monthly payment for a used-vehicle contract was $364, up from $359.

Westlake Financial Services is looking to use a pair of technology advancements in an effort to drum up more business for the finance company that specializes in subprime retail installment contracts.

First this week, Westlake launched an online indirect auto finance pre-qualification platform for new and returning customers looking to finance their next vehicle.

Also, Westlake recently formed a partnership with AutoGravity, a FinTech company that says it’s on a mission to transform auto financing by harnessing the power of the smartphone. The partnership is to provide access to Westlake auto financing options through the innovative AutoGravity digital platform. Qualified buyers are now able to access a broader set of auto finance options through the AutoGravity iOS, Android and Web Apps.

To conclude 2016, Westlake said it dedicated multiple resources to develop a new online platform that aims to make the vehicle buying process — which the company acknowledged can sometimes be confusing and difficult — simple and stress-free.

“By offering online pre-qualification, we help car buyers discover their buying power without affecting their credit,” said Ralph Ontiveros, vice president of Westlake Lending Solutions.

“Upon approval, customers can view inventory available from dealerships that fit their pre-qualification parameters and set up a test drive with the car of their choice at the selected dealership all before closing their browser,” Ontiveros said.

Westlake only offers online pre-qualification in the state of California, but plans to expand to other states throughout 2017. Customers outside of California are not yet able to obtain a pre-qualification or view inventory, but can still go through the financing process online and will be directed to nearby dealers participating in Westlake’s network of over 50,000 preferred dealership program.

“Our goal was to commence 2017 with a platform that benefits car buyers and we achieved just that with this online launch,” said Ian Anderson, group president of Westlake Financial Services. “We even developed incentives to give back to returning customers and to show our appreciation to new customers who choose to finance with us.”

Westlake currently offers vouchers for use toward down payment in the amounts of $200 to new customers and up to $500 to returning customers, based on the amount financed and other select criteria.

Meanwhile with this other partnership, AutoGravity can provide Westlake products to a growing population of digital-first vehicle shoppers. AutoGravity customers, in turn, can benefit from an expanded set of financing options for the vehicle they purchase.

“We created AutoGravity to improve the car financing experience by putting multiple finance options in the palms of customers' hands,” said Andy Hinrichs, founder and chief executive officer of AutoGravity. “Our partnership with Westlake Financial Services drives more customers to dealerships and expands Westlake's ability to finance customers with all credit types.”

AutoGravity contends that it realizes the full potential of smartphone technology to quickly connect vehicle shoppers with finance companies and dealers that fit their needs. Customers can select any new vehicle by make, model and trim, find nearby dealerships that carries that vehicle, apply for financing and choose from up to four personalized financing options in the app. Equipped with an understanding of their options, car shoppers can go to the dealership with financing in hand and close their deal with confidence.

“Westlake is constantly looking to stay ahead of the competition by leveraging technology and allowing for immediate financing options. Putting Westlake financing options on the AutoGravity platform is a great opportunity to expand Westlake's reach to more customers and to help improve the car buying experience for everyone," said Chris Urban, senior vice president of risk management at Westlake Financial Services.

Indirect financing options from Westlake Financial Services are now available on AutoGravity mobile and web apps as a selectable finance company choice.

Westlake’s Dealer Lead Program provides qualified customers actively searching for a new vehicle as free leads to the dealership. For more information, call Westlake Services & Lending Solutions at (877) 285-6971.

Perhaps it’s not yet a significant risk threat to the overall health of auto finance company portfolios, but Experian Automotive’s Melinda Zabritski explained the possible problems if your customers are using the vehicle attached to the installment contract to drive for transportation services such as Uber.

Why?

Currently, Zabritski said, there is not a clear way to track which units are being used for those purposes and which are not.

To put into perspective the potential quandary, Zabritski pointed out that finance company underwriting scorecards often consider that the customer will roll up 20,000 miles or much less on the vehicle during each year of the contract.

When SubPrime Auto Finance News returned from Used Car Week in Las Vegas last year, the Uber driver who provided transportation from Raleigh-Durham International Airport said he put more than 100,000 miles on his SUV in roughly 12 months.

So how do finance companies determine if the contract holder is driving the vehicle that much, especially for services like Uber?

“It’s been talked about, but right now there’s not a good way to measure it,” said Zabritski, who is the senior director of automotive finance at Experian. “There are only a few states that require the registration as a livery service or taxi, in which case you could measure it from a vehicle standpoint. Like through an Experian AutoCheck report for vehicles, it would show up as a taxi.

“Not all states require that so lenders look at it and say, ‘Well, how can I look at it?’ You could look at employment, but just because I work for Uber doesn’t mean I’m a driver. There’s just no hard and fast way to do that,” Zabritski continued during a conversation following a panel discussion about the subprime market at this year’s Vehicle Finance Conference hosted by the American Financial Services Association.

“It’s one of those things that it could be a potential risk since these cars are on the road significantly more than your average consumer,” she went on to say. “There’s more chance they could be in an accident, more wear and tear. As a lender, if I have to go repo this car, I think it’s got 40,000 miles on it and it’s really got 90,000. There’s that kind of potential impact.”

Uber’s online newsroom doesn’t list any specifics about how many drivers currently are in its network. However, Uber’s website highlighted it has drivers in nearly 250 North American cities, including major metro areas such as Chicago, New York and San Francisco as well as broadly classified regions such as Eastern North Carolina and Eastern Washington.

“Lenders will certainly use mileage when they’re doing pricing on originations. But also when they’re forecasting reserves, there’s a lot more analytics being put into place in those portfolios,” Zabritski said.

“In forecasting delinquency, there’s a lot about quality of the vehicle, the value if they do have to repo it and what the asset might be worth and what is the vehicle history since that can impact asset value. It’s those types of things that all get formulated in all of the planning,” she continued.

“And right now (with Uber), it’s a big unknown,” Zabritski added.

Concern about Uber driver income

Not only might risk come from collateral deterioration, finance companies also might not have clear views of how dependent an Uber driver might be on the income generated through the service to maintain payments. In fact, the income Uber drivers might generate triggered actions by the Federal Trade Commission in January.

Uber agreed to pay $20 million to resolve FTC charges that it misled prospective drivers with exaggerated earning claims and claims about financing through its Vehicle Solutions Program. Officials said the $20 million will be used to provide refunds to affected drivers across the country.

“Many consumers sign up to drive for Uber, but they shouldn’t be taken for a ride about their earnings potential or the cost of financing a car through Uber,” Jessica Rich said following one of her last actions as director of the FTC’s Bureau of Consumer Protection. Rich departed the agency on Feb. 10.

According to the FTC’s complaint, in its efforts to attract prospective drivers, Uber exaggerated the yearly and hourly income drivers could make in certain cities, and misled prospective drivers about the terms of its vehicle financing options.

The FTC alleges that Uber claimed on its website that uberX drivers’ annual median income was more than $90,000 in New York and more than $74,000 in San Francisco. The FTC alleges, however, that drivers’ annual median income was actually $61,000 in New York and $53,000 in San Francisco.

In all, the FTC determined less than 10 percent of all drivers in those cities earned the yearly income Uber touted. The FTC also alleged that Uber made high hourly earnings claims in job listings, including on Craigslist, but that the typical Uber driver failed to earn those advertised hourly amounts in various cities.

The complaint also alleged that Uber claimed its Vehicle Solutions Program would provide drivers with the “best financing options available,” regardless of the driver’s credit history, and told consumers they could “own a car for as little as $20/day” ($140/week) or lease a car with “payments as low as $17 per day” ($119/week), and “starting at $119/week.”

Despite Uber’s claims, from at least late 2013 through April 2015, the median weekly purchase and lease payments exceeded $160 and $200, respectively, the FTC alleges.

Officials went on to say Uber failed to control or monitor the terms and conditions of the auto financing agreements through its program and in fact, its drivers received worse rates on average than consumers with similar credit scores typically would obtain, according to the FTC’s complaint. In addition, the FTC said Uber claimed its drivers could receive leases with unlimited mileage through its program when in fact, the leases came with mileage limits.

In addition to imposing a $20 million judgment against Uber, the stipulated order prohibits the company from misrepresenting drivers’ earnings and auto finance and lease terms. The order also bars Uber from making false, misleading, or unsubstantiated representations about drivers’ income; programs offering or advertising vehicles or vehicle financing or leasing; and the terms and conditions of any vehicle financing or leasing.

This week, defi SOLUTIONS rolled out its newest product offering defi SERVICING, a loan management and servicing system (LMS) along with an opportunity for auto finance companies to shape their roadmap for 2017.

The company highlighted the defi SERVICING LMS can give finance companies the same configurability and control that the defi LOS (loan origination system) provides to more than 70 finance companies today.

“We are instilling our vision of configurability, connection, and community into our new servicing system,” says Justin McClintick, program director of LMS for defi SOLUTIONS. “We’re inviting our clients to get in now on the ground floor to help drive the expansion of our servicing system into one that provides exactly what their company needs to take their servicing to a whole new level of efficiency and effectiveness.”

Like the defi LOS, the LMS system is fully configurable by finance companies, so there is no more waiting on IT or a vendor to make the changes needed to drive performance. Capabilities include real-time payment processing, loan adjustments, and extension processing.

The servicing system offers all the basics, like due date change eligibility, tracking, user defined queues and balancing, as well as advanced features like custom field creation and the ability to design each page of the system.

“Lenders should have the autonomy to make changes in their business systems when and how they want. That belief is at the core of everything we create at defi,” said Stephanie Alsbrooks, chief executive officer and founder of defi SOLUTIONS. “Together with our lending community, we’re bringing freedom to lenders by making technology solutions that make lending better for all.”

To get on board now and influence the development, finance companies are being encouraged to go to defiSERVICING.com where they can submit their contact information and join the community of servicing system experts who are driving the future in auto financing.

Consumer Portfolio Services chairman and chief executive officer Brad Bradley not only summarized how his company navigated the fourth quarter, but the outspoken industry veteran also perhaps gave a concise assessment of what’s happening at other subprime auto finance companies and the dealerships within their networks.

First, here are CPS numbers to give a backdrop of how Bradley approached his remarks during the company’s quarterly conference call with the investment community.

CPS posted its 22nd consecutive quarter of positive earnings, generating $7.5 million, or $0.26 per diluted share. The figure marked a bit of a drop-off from the $9.0 million, or $0.29 per diluted share, in net income the company posted during Q4 of 2015, but Bradley insisted the performance was in line with company expectations.

CPS’ revenue climbed 13.5 percent during Q4 and 16.1 percent for the full year, landing at $108.2 million and $422.3 million, respectively.

During the fourth quarter, CPS said it purchased $215.3 million of new contracts compared to $242.1 million during the third quarter of 2016 and $269.2 million during the fourth quarter of 2015. The company’s managed receivables totaled $2.308 billion as of Dec. 31, an increase from $2.292 billion as of Sept. 30 and $2.031 billion as of the close 2015.

The company’s annualized net charge-offs for Q4 stood at 6.97 percent of the average owned portfolio as compared to 6.23 percent for the fourth quarter of 2015. Delinquencies greater than 30 days (including repossession inventory) ticked up to 10.96 of the total owned portfolio as of Dec. 31 as compared to 9.53 percent a year earlier.

Bradley opened his remarks to the Wall Street watchers by referencing a Chinese proverb that states in part, “May you live in interesting times.”

He continued with, “We at least at CPS — and the industry — are living in interesting times. Again everything you see — higher delinquency, higher losses — now in the fourth quarter everybody slowed down as everybody dropped something between 15 percent and 20 percent in volume.

“There’s a lot concerns, regulatory and the economy and the industry in general. So these are interesting times,” Bradley went on to say.

Having been in the subprime auto finance business since 1991 is part of the reason why Bradley is confident CPS will navigate through whatever challenges might be coming later this year.

“Generally speaking that’s a lot of what the fourth quarter came out at, that’s a lot of what 2017 is going to come out at,” Bradley said. “(The company will be) trying to stay the course and just see how the rest of these moving pieces shake out and hopefully be in a position to take advantage of it and maybe be in a position to have done the best of everyone there. So we’ll see how it goes but that is kind of the focus we’re going to have.”

As mentioned previously, CPS bought less paper during Q4 and Bradley explained why — again referencing what might be the case for other companies, too.

“The business was slow in the fourth quarter, significantly slower than we would have expected. Again our focus is on quality over quantity,” Bradley said. “You can almost feel the other companies reaching to provide their earnings or the growth that they’re expected to have, (but) we’re not in that kind of position. And so we’re not trying so hard and as a result our numbers are down a bit. But again we would rather have the quality over the quantity any day of the week.”

Later in the call, Bradley went on to say. “Lot of people in the originations area are seeing more and more sort of challenging or bad loans that we don't want to buy, and that’s a real good indicator of what's coming out of the dealership. And the way it works is if we’re seeing a lot of good loans, it means we get what we want to the extent, and also it means that dealers have lots of loans to send you.

“To the extent that problems are getting more difficult, dealers start trying to push through riskier and not-as-good loans. And so when you start seeing more of those, you can almost tell that in the marketplace, the dealers are struggling just as much as we are because they’re trying to push through bad deals that we don't want and they know most times we’re not going to buy them,” he continued.

“So that gives you an idea that they're even trying to send and shows you that the market is difficult. But again keeping our originations model the way we want it, and buying what we want to buy, in the end will pay off much better than any other course,” Bradley said.

“In terms of collections, I think everybody is now, at least we are, comfortable with the new dynamic that given all the technology our customers are a whole lot smarter and a whole lot more aware of what's going on. And so when we’re looking for them, they just look at their iPhone and decide whether or not to take the phone call,” Bradley said. “However, when we then tell them we’re going to take their car, they pay.

“And so we’ve now for over a year or more run this higher (delinquencies), but not with horribly higher loss rates,” he continued. “If the loss rates truly tracked the (delinquencies) that we’ve been seeing, the losses would be much, much worse. And so there really is this new thing or new dynamic where customers pay you when you’re going to take their car as opposed to just paying you as soon as you start calling them. We’ve gotten used to that.

“We’ve redone the way we collect and certainly part of that is the regulatory environment, the way you now have to speak to customers and how often you can call them and things like that,” Bradley went on to say. “That whole thing is now settled in as our culture has changed and so we’re real happy with that.”

Update on securitizations

Back in January, CPS announced the closing of its first term securitization in 2017. The transaction was CPS’ 23rd senior subordinate securitization since the beginning of 2011 and the sixth consecutive securitization to receive a triple-A rating on the senior class of notes from at least two rating agencies.

In the transaction, qualified institutional buyers purchased $206.3 million of asset-backed notes secured by $210.0 million in automobile receivables purchased by CPS. The sold notes, issued by CPS Auto Receivables Trust 2017-A, consisted of five classes.

Ratings of the notes were provided by Standard & Poor’s, DBRS and Kroll Bond Rating Agency, and were based on the structure of the transaction, the historical performance of similar receivables and CPS experience as a servicer.

Note
Class

Amount

Interest
Rate

Average
Life

Price

S&P
Rating

DBRS
Rating

KBRA
Rating

A

$99.12 million

1.68%

.87 years

99.99906%

AAA

AAA

AAA

B

$29.92 million

2.68%

2.14 years

99.98567%

AA

AA (high)

AA

C

$32.66 million

3.31%

2.84 years

99.98111%

A

A

A

D

$24.57 million

4.61%

3.59 years

99.99845%

BBB

BBB (low)

BBB

E

$20.05 million

7.07%

4.14 years

98.98958%

BB-

BB (low)

BB-

The weighted average coupon on the notes was approximately 3.91 percent.

The 2017-A transaction has initial credit enhancement consisting of a cash deposit equal to 1.00 percent of the original receivable pool balance and over-collateralization of 1.75 percent.

The final enhancement level requires accelerated payment of principal on the notes to reach overcollateralization of 5.15 percent of the then-outstanding receivable pool balance.

Bradley mentioned in a company news release that the securitization CPS completed last October “achieved the lowest blended cost of funds of any deal since the second quarter of 2015.”

During the quarterly conference call, CPS chief financial officer Jeffrey Fritz added, “The asset-backed market continues to be very liquid, and so we continue to take advantage of that.”

The latest TransUnion Industry Insights Report found that 80 million consumers held a vehicle lease or retail installment contract as of the close of 2016. Analysts determined the figure marked the highest level TransUnion has observed since at least the third quarter of 2009, as approximately 4.3 million additional consumers last year took out what can be clearly classified as vehicle financing.

However, SubPrime Auto Finance News asked TransUnion’s Jason Laky to consider whether the funds consumers are using to acquire a vehicle are coming from other sources such as personal loans, which reached a new milestone at the conclusion of 2016 with total balances topping $100 billion for the first time ever.

Laky is senior vice president and automotive and consumer lending business leader for TransUnion, so his jurisdiction is both the auto finance and personal loan markets. Laky approached this difficult question by first explaining the primary reasons personal loans exist.

“For the prime or better consumers, the biggest use of the personal loan but not the only one is debt consolidation,” Laky said. “A lot of lenders are promoting to use a personal loan to pay off credit cards or other high interest loans you have at a lower interest rate and a predictable monthly payment that an installment gives.

“The second use that’s more prevalent in the non-prime and subprime areas where consumers don’t have as much financial security, those loans tend to be used for more immediate needs, whether it’s large repairs or a bridge loan for some education, something like that. The loan sizes are a little smaller and the use tends to be much more utilitarian,” he continued.

Laky explained that TransUnion’s data cannot shed specific light on what purpose consumers use personal loans; if they are in fact the monies used by a consumer to make the necessary down payment for an auto finance company to complete underwriting of the contract. But Laky also acknowledged there has been rumblings of this practice happening more often.

“One thing we’ve certainly started to pay attention to is we have heard it mentioned out the marketplace this idea of using the personal loan to make the down payment or to cover negative equity,” Laky said. “We don’t see in the TransUnion credit file the actual use of the personal loan. We don’t know where the funds go, but it’s certainly a possibility.

“We’ve heard a couple of lenders mention that it may be going on out there. It’s certainly something we may go ahead and look at studying,” he continued. “From a lender’s perspective, I’m sure that whenever you have a consumer that takes out a personal loan in order to cover some gap in the auto financing, it’s probably a flag that’s a higher risk consumer than maybe you think.”

The amount of risk finance companies, banks and credit unions are already holding in the auto finance market still is growing significantly. TransUnion reported total auto financing balances climbed to $1.11 trillion at the close of 2016. Analysts indicated the total balance grew 8.3 percent during 2016, slower than the average growth rate of 11.0 percent between 2013 and 2015.

The average vehicle financing balance per consumer also rose slightly to $18,391, up from $18,004 in Q4 2015.

“For the second consecutive quarter, total auto balances had a year-over-year growth rate below 10 percent, reflecting the slower growth that we are seeing in new car sales,” Laky said in a news release from TransUnion.

“In the third quarter, auto originations declined year-over-year for the first time in six years,” he continued. “Prime plus and super prime originations continued to grow in Q3 2016, indicating lenders are beginning to shift their focus away from the riskiest segments, where we’ve seen strong competition among lenders that has put pressure on risk adjusted margins.”

TransUnion determined that originations declined 0.8 percent to 7.46 million in Q3 2016, down from 7.52 million in Q3 2015. Subprime originations experienced the largest decline (down by 3.2 percent), and prime plus (up 1.8 percent) and super prime (up 1.7 percent) originations grew in the third quarter of 2016.

Analysts went on to mention the auto delinquency rate reached 1.44 percent to close 2016, a 13.4-percent increase from 1.27 percent rate in Q4 2015. They added auto delinquency is at its highest level since the Q4 2009 reading of 1.59 percent.

More details about personal loans

As mentioned previously, TransUnion’s Industry Insights Report confirmed personal loans reached a new milestone at the end of last year with total balances topping $100 billion for the first time ever. While younger consumers have played a major role in the growth of these lending products, analysts found that, contrary to popular belief, mature borrowers are leading the charge on these loans.

TransUnion added that total personal loan balances grew $14 billion between year-end 2015 and year-end 2016, reaching $102 billion. The number of consumers with a personal loan continued to climb steadily and ended 2016 at the highest level since at least Q3 2009. In Q4 2016, 15.82 million consumers had a personal loan.

TransUnion noted baby boomers comprised 32.8 percent of all consumers with a personal loan when 2016 ended, followed by Gen X (31.6 percent) and millennials (26.6 percent). In Q4 2013, millennials were just 23.5 percent of personal loan users, but their share has grown over the past three years to reach 26.6 percent at the end of 2016.

“There is a perception that personal loan growth has been driven by younger consumers, but our data clearly indicate that these loans are appealing to older borrowers,” Laky said in the same release. “We believe some of this growth is occurring because interest rates may be lower than other type of loans for certain baby boomer segments.”

Analysts went on to mention the personal loan delinquency rate was 3.83 percent in Q4 2016, the highest Q4 reading since Q4 2013 and up from 3.62 percent in Q4 2015. Originations, viewed one quarter in arrears, declined for the second consecutive quarter. Originations dropped 5.7% from 3.75 million in Q3 2015 to 3.54 million in Q3 2016.

“We’ve observed a decline in non-prime lending that we attribute to mid-year FinTech funding challenges and regulatory uncertainty in advance of the election,” Laky said. “We believe that the personal loan market is stabilizing, and have seen balances grow across risk tiers through the end of the year.”

About a year ago, GM Financial restructured internal management to strengthen its AmeriCredit division — the original piece General Motors acquired almost seven years ago.

Since that point, GM Financial has since become the captive for the parent automaker. However, AmeriCredit remains a crucial cog in GM Financial’s operation, remaining as it has since its inception back in 1992 as a finance company that caters to the subprime market.

Just before GM Financial released its fourth-quarter and full-year results, SubPrime Auto Finance News connected with Paul Gillespie, who is the senior vice president for AmeriCredit sales and credit operations.

“I will say 2016 was very much for us like 2015 from an originations standpoint in the AmeriCredit channel, which was in line with our target,” Gillespie said. “We had not made any real material changes to our underwriting or pricing strategies so we’ve pretty taken the approach of ‘We’ll take what the market will give us on our terms.’ I think given to how we fit into the bigger picture of GM Financial, that is the approach we’re most comfortable with.”

The exact figures GM Financial released later showed that 12 percent of its North American originations fell into what the company classified as near-prime; contract holders with FICO scores between 620 and 679. The company indicated that it originated $1.065 billion worth of contracts in this tier during the fourth quarter.

“We have dedicated sales, credit and management now to the AmeriCredit channel. It really has paid some dividends,” Gillespie said.

“We’ve seen some growth over the second half of the year. We are hopeful that will be a trend that will continue this year. Again, it’s really going to be on our terms. We’re not looking to grow artificially. We’re looking to grow along with our credit and pricing strategy dictating that,” he continued.

Gillespie emphasized that AmeriCredit’s relationships are solely with non-GM dealerships. Most of the little more than 8,000 stores in AmeriCredit’s active network are franchised operations while there are some independent dealerships, “but we’re pretty selective on how we quality independent dealers,” Gillespie said.

“It’s a little trickier space to manage but we do have those relationships and some are very good. But our primary volume and focus is on non-GM franchised stores,” he added.

While the company’s Q4 volume in near-prime and subprime softened slightly year-over-year — less than 6 basis points for both categories — Gillespie pointed out what’s encouraging about the characteristics of the paper that is coming into the portfolio.

“The one thing we’ve seen is consistency year-over-year with respect to through-the-door application scores as well as funded contract scores. We feel good about that,” he said.

“On the flip side of that, we have seen the market start to shift a little bit more to longer terms, even some lenders out there doing 84-month terms, and shifting their volume to 75-month terms. We don’t do any 84-month (contracts), and we do very little 75-month (contracts),” Gillespie continued. “We try to hold the line on term given the fact that this is subprime. Again, this fits our strategy of taking what the market will give us on our terms. That’s the nice part of being a part of GM Financial is we really don’t have an originations number we have to hit. This gives us a little bit of luxury relative to some of our competitors.”

Another advantage Gillespie mentioned is AmeriCredit’s access to the auto asset-backed securities market. Having been in business certainly helps, he said.

“We’ve had a long-standing relationship with the ABS investment community,” Gillespie said. “We’ve always had a great track record with the investment community. I think if you were to speak to any of them they would tell you we’ve always been very transparent in how we manage our business and what we share about our performance and what’s going into the portfolio.

“Having said that, our strategy is to continue to fund the AmeriCredit channel through the ABS market. At the same time, we’re going to be very consistent in what we’ve done in the past with them and maintain the relationships that we’ve built with the ABS market,” he went on to say.

The latest ABS assessment from S&P Global Ratings backs up Gillespie’s claims. Analysts said when evaluating the AmeriCredit Automobile Receivables Trust 2017-1, “Our expectation that under a moderate stress scenario, our ratings on the notes will not decline by more than one rating category from our preliminary ratings (all else being equal) over a 12-month period.”

It’s assessments like that one that triggered Gillespie to remark, “I don’t want it to sound like bragging, but I think we have one of the best relationships in the ABS market of any lender out there.”

With the first quarter nearly at its halfway point, SubPrime Auto Finance News closed its conversation by asking Gillespie about what he plans to watch closely as the year unfolds.

“The one that is top of mind for everybody is watching what happens with interest rates. After a long period of stagnation with interest rates, we’re starting to see a little upward climb, so making sure that we adjust our pricing as necessary to maintain our profitability targets,” Gillespie said.

“Secondarily, auction prices and used-car valuations, there’s a number of sources out there that have forecasted that we’re going to see declining valuations. So we’ve got to be cognizant of that and make sure if that is truly happening that we’re adjusting our approach to underwriting to reflect that,” he continued.

“Lastly, the continued expansion of term on contracts,” Gillespie went on to say. “We need to make sure that if that continues, that we have the proper balance of how much extended term we really are doing versus how much we’re uncomfortable with doing. It’s a little bit of a juggling act. It’s something we’re going to be watching closely, but our preference would be to stay where we are right now around that 72-month number and not migrate much north of that.”

Both Enterprise Car Sales and Auto Financial Group (AFG) recently highlighted how much success they’re having with credit unions.

Enterprise Car Sales said it generated a record $575 million in financing volume to more than 31,000 credit union members during 2016. The 2016 amount represents a 15-percent increase from the previous year.

Meanwhile since September, AFG said it has signed seven new credit unions to its balloon lending program, resulting in a reach increase of 1,563,615 new consumers.

Officials mentioned Enterprise Car Sales’ record auto origination volume is following the overall trend of ongoing financing growth in the credit union sector. New reports show credit unions have increased total automotive finance market share to 19.6 percent, up 2 percentage points from a year ago.

In addition, officials added used-vehicle financing offers increased profit potential for credit unions with average used-vehicle finance amounts reaching a record high of $19,227 in the third quarter of 2016.

In fact, Enterprise Car Sales said it has helped generate $10 billion in origination volume during the last 30 years with more than 1,000 credit union partners nationwide.

“Last year’s record-setting credit union loan volume is further evidence of the value both Enterprise and our credit union partners place on the importance of customer service,” said Beth Wheeler, corporate director of business development at Enterprise Car Sales.

“Complete customer satisfaction is the cornerstone of our business, and our credit union partners share that commitment with their members,” Wheeler continued. “As a result, we’ve developed a three-decade partnership that continues to grow stronger and more productive year after year.”

And credit unions appreciate how Enterprise Car Sales structures its retail system, which includes a seven-day/1,000-mile repurchase policy, a 12-month/12,000-mile limited powertrain warranty and a year of unlimited roadside assistance.

“It’s reassuring to partner with a company that cares about customer service as much as we do,” said Sam Whitehurst, chief executive officer and president of Summit Credit Union of North Carolina, which has partnered with Enterprise Car Sales for several years.

“Enterprise provides the same kind of individualized care and attention that we give our members day in and day out,” Whitehurst continued. “When we refer our members to Enterprise for their used vehicle purchases, they frequently come back remarking on the ease of their car-buying experience.”

AFG’s fall growth figures

As mentioned, Auto Financial Group (AFG), a provider of financing products for credit unions and banks said it has signed seven new credit unions to its balloon lending program, resulting in a reach increase of 1,563,615 new consumers. These new organizations include:

— Gold Coast Federal Credit Union

— St. Cloud Federal Credit Union

— PA Central Federal Credit Union

— Laramie Plains Community Federal Credit Union

— Straits Area Federal Credit Union

— Valley Federal Credit Union of Montana

AFG emphasized the company is “thrilled” to partner with these credit unions, representing combined assets of more than $1.3 billion across eight states. In addition to these credit unions, Ignition Financial also signed on as a partner.

“We welcome these financial institutions to the growing AFG family,” AFG chief executive officer Richard Epley said. “Residual based financing is at an all-time high in the U.S. and we’re excited that these institutions have chosen our program.”

Epley added Auto Financial Group expects continued growth through the first quarter as the company seeks to provide their unique financing products and solutions to financial institutions across the U.S.

AFG’s Balloon Lending program can provide institutions with a walk-away, residual based, balloon loan program that is fully insured, and where AFG takes 100 percent of the residual value risk and completely manages the end of term process.

The company highlighted the report, and accompanying summary video that can be viewed here or at the top of this page, draws important conclusions from discussions between technology experts and senior delegates from the world’s largest captive finance providers at White Clarke Group’s annual Auto Captives Summit, which took place in London last November.

The summit identified four main elements that are driving the new digital ecosystem. These elements, which the report describes in detail, include:

• The changing nature of the customer base;

• The transformational nature of new technologies such as artificial intelligence, chatbots and blockchain

• The accelerating pace of technology causing disruption to traditional business models

• The growing threat from cybersecurity and ever-growing regulatory and security demands

“We are in an age of ‘connected intelligence’, surrounded by a range of products and services which link together to make up a digital ecosystem,” Gleeson said. “We are experiencing an explosion of innovation, which has a profound impact on how we interact with each other, and how businesses build and maintain a relationship with their customers.

“To succeed in the new ecosystem, organizations must adapt fast –learning new skills, staying abreast of new technology and developing new models for the delivery of finance to avoid the threat from disruptors,” he went on to say.

Specialty auto finance company Exeter Finance Corp. announced on Monday that it appointed company veteran Brad Nall to be chief financial officer in a move that was effective Feb. 1.

Nall joined Exeter in July 2012 and has more than 25 years of experience in the consumer finance industry. He has held numerous senior roles during his career within budgeting and strategic planning, financial reporting, project management, business development, mergers and acquisitions, whole loan sales and structured finance.

The company highlighted Nall also has a strong background in the areas of operations, risk management, credit and pricing, accounting, control and compliance. Prior to Exeter, he spent 12 years at Citi's auto finance and personal loan businesses in various finance roles.

“I am pleased and honored to serve in this role for Exeter Finance,” Nall said. “During my tenure here, I have seen the company grow and thrive beyond expectations. I look forward to contributing to the continued growth of the organization as well as serving our dealers and customers in the most effective manner possible.”

And the company apparently will be executing that strategy under the assumption that there is not a subprime “bubble” inflating. Grubb agreed with assertions made by the three credit bureaus at the outset of the Vehicle Finance Conference hosted by the American Financial Services Association last month in New Orleans. Grubb participated on the CEO panel to close the event and touched on the topic.

“Our 2016 vintages performed better than 2015,” said Grubb, who also is a member of AFSA’s board of directors. “Even though we’ve seen a deterioration in the wholesale market where our severity is worse but our frequency is less. Most people grabbed more yield in 2016 so they’ve been able to save their margins even though we’ve seen a decline in the wholesale market.

“There are headwinds obviously,” he added. “Hopefully a lot of us have been originating with lesser LTVs and provisioning for the losses. We can add an adjuster for higher depreciating vehicles and other measures that can be taken to offset some of this.”